The central bank of Turkey is in the process of cutting the domestic interest rates. Due to COVID-19, these measures were only a matter of time. The Turkish lira is not doing too bad, given the circumstances, but it is the ninth straight rate cut.
Lower Interest Rates in Turkey
Similar to virtually all other countries in the world, Turkey now has lower interest rates compared to a few months ago. More specifically, the Turkish central bank has initiated its ninth straight rate cut in relatively quick succession. Contrary to what some may believe, however, this doesn’t have negative effects on the domestic currency.
In fact, economists are convinced that this latest rate cut is a direct result of the Turkish Lira bouncing back strongly. When it hit record lows earlier in May, there was some genuine concern. However, it would appear that things are heading in the right direction once again, albeit it too early to draw long-term conclusions.
Propping up the lira has been an ongoing struggle for the central banks. Millions of dollars in foreign currency reserves have been utilized to ensure this venture would be successful. With lower borrowing costs now in place, the economic recovery can finally begin. In fact, the current cost of borrowing money in Turkey is already negative, making for a very interesting situation.
Several factors contribute to the interest rates cut. First of all, Turkey managed to triple its agreement with Qatar regarding its currency swap. The limit between both countries has been raised to $15 billion, allowing money to flow both ways during these uncertain times.
Secondly, Turkey has the highest number of COVID-19 cases in the Middle East. With an economy already under pressure before the pandemic, something had to be done. While the tourism sector will not see any relief for some time to come, cutting the interest rates is the only viable option.
Still Ample Gold Reserves
While the central bank of Turkey may be tapping into foreign currency reserves for economic relief, its gold reserves are still on the rise. Since January of 2017, the central bank has been stockpiling gold reserves. The total amount more than tripled in the past 36 months, with a further increase likely to follow.
It is remarkable to see the bank not use its gold reserves for economic relief as of yet. This seems to strengthen the indication of how gold will become more prominent in the monetary system moving forward. Experts have called for reinstating the gold standard sooner rather than later, but that may not happen anytime soon.